2020 was the first year that investment in ESG-oriented funds hit the USD 1 trillion figure (according to FT Advisor). However, Morgan Stanley – the largest private wealth manager in the US – estimates that high net worth clients in the US have over USD $4 trillion invested in sustainable investments.
According to Alex Dunnin from finance research house Rainmaker "the coronavirus pandemic has been a real-time experiment on the effectiveness of environmental, social and governance (ESG) investing. For investors who have invested in companies which follow environmental, social and governance principles, generally these investments have outperformed non-ESG funds.
The ESG sector has passed that test with flying colours, because as we go through this massive shake-up and turmoil, it turns out ESG is a pretty good investment solution for bad times as well as good,” says Dunnin.
Two mega-trends are hastening the flow of funds into ESG investing. The first being regulation. The move towards carbon neutrality by Germany and England for Carbon neutrality by 2050 and now China also looking by 2060.
ESG issues have become much more important for long term investors,” Cyrus Taraporevala, president and CEO of State Street Global Advisors, said “We seek to analyse material issues such as climate risk, board quality, or cybersecurity in terms of how they impact financial value in a positive or a negative way. That’s the integrative approach we are increasingly taking for all of our investments.”
The second mega-trend influencing investment flow into ESG investing is the massive intergenerational wealth transfer from baby boomers to their children. More than a quarter of family offices are now engaged in impact investing in some form, according to a 2019 Global Family Office report from UBS and Campden Research. The average wealth of the families UBS surveyed was USD $1.2 billion.
Meaghan Victor, managing director of State Street Global Advisor and head of its Asia-Pacific distribution of exchange traded funds (ETFs) says internal research by her company showed female and young investors preferred ESG protocols. She said” 68% of women and 82% of millennials said that a company’s social, political and environmental impact was important to their decision on whether to invest or not invest”
Climate change was the top cause supported by family offices, according to UBS, with health and clean water ranking high.
What is ESG investing?
ESG stands for environmental, social and governance. Investors (retail and institutional) are increasingly applying these non-financial factors as part of their analysis process to identify material risks and growth opportunities and eliminate companies which have a harmful impact of society or the environment.
The United Nations Sustainable Development Goals (UNSDG) provide the most widely used point of reference for ESG investing. If any investment does not make a positive impact on one or more of the UNSDG, it is unliklely to be an ESG compliant fund.
There are many different approaches that incorporate some or all of the following methodologies.
Norms based screening – eliminating companies that violate some set of norms such as UNSDGs
Positive/best in class screening – selecting companies with an especially strong ESG rating
Sustainability-themed investments – such as in a fund that focuses on clean-water or sustainable agriculture
ESG Integration – including ESG factors in fundamental analysis
Impact investing – only investing in companies that have a positive impact on an ESG issue whilst earning a market return.
Negative/exclusionary screening – eliminating companies that violate some set of norms such as UNSDGs.
What should CEO’s be doing?
Larry Fink, CEO of investment giant Blackrock, wrote in a 2018 letter to shareholders that companies must be imbedded with “a sense of purpose”. He wrote that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society”. He expanded on this in 2019 letter called “profit and purpose” where he noted “profits are in no way inconsistent with purpose – in fact, profits and purpose are inextricably linked”.
An excellent definition of this was recently stated by Colin Mayer, a professor at University of Oxford “the purpose of a company is not just to deliver profits; it is to produce solutions to problems of people and planet and in the process produce profits”.
The easiest way for a company to communicate its place in society is to publish a statement of purpose which articulates the company’s reason for being, indemnifies the stakeholders most important to its continued prosperity and discusses the time frames and metrics by which senior managements decisions are evaluated and rewarded.
Increasingly companies are required by statutory authorities to produce an integrated sustainability report on how the on how the company’s strategy, governance, performance, and prospects as a part of the external environment in which the company operates lead to creation of value. This usually involves a materiality analysis of ESG issues that impact financial performance. This report demonstrates to shareholders and stakeholders the company is practicing “integrated thinking” regarding its role in society. This helps focus the company on changing the orientation from short-term financial results to long-term value creation.
The companies being left behind by ESG investing
The ESG investing decisions and ramifications are evolving rapidly.
In November 2020 Australia’s largest superannuation fund, AustraianSuper (manager of over AUD $180 billion in retirement savings) dumped its investment in Whitehaven Coal (ASX: WHC) as it moves to ensure its investment strategy is consistent with a net zero emissions by 2050.
Other Australian superannuation funds such as Hesta and AwareSuper and Hesta are exiting companies where pollution and negative environmental impact is a material factor.
A leading Australian boutique find manager has also dumped Rio Tinto from its sustainable equity fund due to concerns over the Juukan Gorge blast where Rio Tinto destroyed a 46,000-year-old sacred Aboriginal site so it could mine iron ore.
Companies to benefit from ESG investing in 2021
We consider the following Australian companies will receive increased global investor attention in 2021 as due to their positive ESG and impact credentials and their global growth strategies.
Agriculture
Wide Open Agriculture Limited (ASX: WOA) and (FRA: 2WO)
Biotech
Antisense Therapeutics Limited (ASX: ANP) and (FRA: AWY)
Immutep Limited (ASX: IMM) and (FRA: YP1A)
PYC Therapeutics Limited (ASX: PYC) and (FRA: PH7)
Regeneus Limited (ASX: RGS)
Imugene Limited (ASX: IMU)
Starpharma Limited (ASX: SPL)
Minerals and EV Stream
Ecograf Limited (ASX: EGR) and (FRA: FMK)
Neometals Limited (ASX: NMT) and (FRA: 9R9)
Lake Resources Limited (ASX: LKE) and (FRA: LK1)
Calix Limited (ASX: CXL)
Technology and green energy
Hazer Group Limited (ASX: HZR) and (FRA: 2H8)
Anteotech Limited (ASX: ADO)
Global Energy Ventures Limited (ASX: GEV)
Vection Technologies Limited (ASX: VR1)
Envirosuite Limited (ASX: EVS) and (FRA: 57P)